For the past few weeks, as stock prices have collapsed, the government has been quietly using public sector insurance companies to shore up stock prices. These companies, led by Life Insurance Corporation of India (LIC), have invested tens of thousand crore rupees in a futile attempt to hold up stock prices. It is not clear how badly this will affect their finances in the short term. (Even in the long term, buying low-priced shares could turn into a bonanza only if the portfolio is managed transparently and LIC does not sell blocks of shares at small gains).
Consider how this quiet rescue has been working. Foreign Institutional Investors (FIIs), trading through non-transparent Participatory Notes (PNs) have been making money in a falling market by short-selling Indian stocks, which the SEBI (Securities and Exchange Board of India) has refused to stop. Instead, LIC and other institutions have been asked to shore up stock prices to stem every bout of panic. The insurance behemoth is understood to be making staggering purchases in the region of Rs 2,000 crore daily during the worst panic phase of September and October. The insurance regulator, which has just started collecting information on Unit Linked Insurance Plans (ULIP), has not even woken up to LIC’s market operations. SEBI also does not ask ULIPs to make the same disclosures as mutual funds.
On 21st April, SEBI Chairman, C B Bhave, asked institutional investors to start paying margins on their transactions. But it is clearly not working as intended. LIC’s daily transactions are often in excess of its own custodian's networth. Stock Holding Corporation of India (SHCIL), India’s largest custodial agency, ends up taking an intraday bridge overdraft in excess of its entire networth to make the daily pay-in. Bankers say that this situation arose because LIC did not want to leave overnight float funds with SHCIL; consequently the risk was pushed on to Corporation Bank which is unwilling to shoulder the burden alone. Sources say that SHCIL's basic networth is a mere Rs 300 crore. Even if one includes the value of the National Stock Exchange stake (7% equity valued at around Rs 1100 crore), SHCIL's networth would not cross Rs 1400 crore.
SHCIL has a "Funds pool account" at Corporation Bank in which it receives monies from its many institutional clients (in line with their payment obligations) through normal RTGS banking channel clearing or intra-bank funds transfer for pay-in on their behalf. The payment to the stock exchange clearing bank is made through this account and when there is a delay in receiving funds from LIC, then Corporation Bank provides an "intraday bridge" overdraft to SHCIL's account.
Things came to a head when Corporation Bank's Risk Management Cell raised a red flag about providing such a huge overdraft to SHCIL, which is LIC’s primary custodian. The extent of daily "intraday bridge" overdraft often resulted in total debits approaching or in excess of Rs 2000 crore per day. The transactions could fall foul of Corporation Bank’s norms as well as RBI policy if carried overnight (even unavoidably) or worse if it occurs on reporting Friday.
This is an issue that clearly needs a systemic solution like better oversight of SHCIL and a possible conversion into a limited purpose bank for the securities market. However, there seems no attempt to initiate a thorough clean up at SHCIL leading to recurring problems from time to time. Worse, SHCIL now has Rs 6 lakh crore of assets under custoday and has extended its operational risk after becoming the custodian for the new pension scheme, it is also the Central record-keeping agency for e-stamping transactions which are in the process of being rolled out in some states through www.shcilestamp.com .
Interestingly, SEBI, as the capital market regulator, does not seem to notice SHCIL's operations even though it remains under investigation by the Serious Fraud Office of the Ministry of Corporate Affairs. We learn that SHCIL is now trying to rope in its promoter institution IDBI Bank to become a clearing bank for stock exchanges and take on this responsibility.
Now consider the incestuous cross-holdings between these institutions and why they find it difficult to speak up. SHCIL shares are held by a bunch of banks such as IDBI Bank, ICICI Bank, IFCI (16.99% each), LIC (15%) and the four public sector general insurance companies (together holding 15%). LIC holds a 15% stake in SHCIL and a massive 26.32% stake in Corporation Bank. Further, SHCIL's Managing Director R.C.Razdan is from the IDBI, as was R.K. Bansal, who held charge for a while after R Jayaraman Iyer, the controversial previous Chairman was given the marching orders.
I have sent emails to the Chairman of Corporation Bank and LIC as well as the Managing Director of SHCIL and various other nominee directors from IDBI, LIC and ICICI Bank. Nobody has replied. However, my sources say that some investors have requested a board meeting on 3rd November to discuss the issue.